Not all income is taxed the same way — and some isn't taxed at all. Understanding what HMRC counts as taxable income is the starting point for every tax calculation you'll ever do.
The simple definition
For UK tax purposes, taxable income is the portion of your total income that remains after applicable allowances and exemptions have been subtracted. Income tax rates are then applied to this taxable amount at your marginal band.
The formula:
Taxable income = Gross income from all sources − Allowances (Personal Allowance, PSA, etc.) − Reliefs (pension contributions, Gift Aid)
If your taxable income is £0 or negative, you owe no income tax. If positive, tax is calculated by applying each band's rate to the portion falling within that band.
What HMRC counts as income
Earned income
- Employment: salary, wages, bonuses, tips, commission, overtime
- Benefits in kind (BIK): company car, private health insurance, gym membership — taxed at their notional cash value
- Self-employment: trading profits from a sole trade or partnership, after allowable business expenses
- Pension income: State Pension, workplace pensions, personal pensions, annuities
- Redundancy pay above the £30,000 tax-free threshold
- Termination payments (post-employment notice pay)
Savings and investment income
- Bank and building society interest
- NS&I interest (except tax-exempt products)
- Bond coupon payments
- Peer-to-peer lending income
- Interest distributions from authorised funds
Dividend income
Dividends from UK or foreign companies, whether paid in cash or as scrip dividends. Taxed separately from earned income at 10.75% / 35.75% / 39.35% depending on your band, above a £500 Dividend Allowance.
Property income
- Rental profits from UK residential or commercial property
- Rent a Room Scheme income above the £7,500 threshold
- Furnished Holiday Let income
- Ground rent, lease premiums (partly)
Miscellaneous income
- Trust income distributions
- Foreign income (with possible Foreign Tax Credit relief)
- Estate distributions
- Certain state benefits (Jobseeker's Allowance, Carer's Allowance, some Employment and Support Allowance)
- Royalties, literary income
What HMRC does NOT count as income
Completely tax-free
- ISA returns: interest from Cash ISAs, dividends and capital growth from Stocks & Shares ISAs
- Premium Bonds prizes and wins from the National Lottery
- Child Trust Fund / Junior ISA returns
- PEPs and Lifetime ISAs (subject to rules)
- Gifts and inheritances (though IHT may apply to the giver's estate)
- Some state benefits (Universal Credit, PIP, Attendance Allowance, Winter Fuel Payment, Cold Weather Payment)
- Gambling and betting winnings
- Redundancy pay up to £30,000
- Life insurance lump sums paid on death
- Compensation for personal injury
- Foster care relief (qualifying care receipts up to relevant threshold)
Tax-free within limits
- Rent a Room: first £7,500/year tax-free
- Trading allowance: first £1,000 of casual trading income tax-free
- Property allowance: first £1,000 of property income tax-free
- Personal Savings Allowance: £1,000/£500/£0 by tax band
- Dividend Allowance: £500
- Starting Rate for Savings: up to £5,000 if other income is low
The allowances that reduce taxable income
Between gross income and taxable income sits a layer of allowances:
| Allowance | Amount (2026/27) | Applies to |
|---|---|---|
| Personal Allowance | £12,570 | All earned/savings/pension income (tapers above £100k) |
| Personal Savings Allowance | £1,000 / £500 / £0 | Savings interest |
| Starting Rate for Savings | Up to £5,000 | Savings interest if other income is low |
| Dividend Allowance | £500 | Dividend income |
| Marriage Allowance | Up to £1,260 transfer | Between spouses/civil partners |
| Rent a Room | £7,500/year | Room rental in your home |
| Trading allowance | £1,000/year | Casual trading |
| Property allowance | £1,000/year | Casual property income |
Use our UK Income Tax Calculator to see how these apply to your specific income mix.
How taxable income differs from gross income and net income
Three overlapping concepts confuse everyone:
- Gross income: everything you earn before any deductions. Your £50,000 salary is your gross employment income.
- Taxable income: gross income minus allowances and reliefs — the amount HMRC actually taxes. For someone earning £50,000, the taxable income is typically £37,430 (£50,000 minus the £12,570 Personal Allowance).
- Net income: what actually lands in your bank account — gross income minus income tax minus National Insurance minus student loan (if any) minus pension contributions (if deducted at source).
A £50,000 earner in 2026/27 has:
- Gross income: £50,000
- Taxable income (after Personal Allowance): £37,430
- Income tax: £7,486 (20% of £37,430)
- NI: £3,002
- Net take-home: approximately £39,512
Foreign income for UK residents
If you're UK tax resident, HMRC generally taxes your worldwide income. You declare foreign income on the Foreign pages of your self-assessment return. Where you've already paid tax on foreign income overseas, Foreign Tax Credit Relief typically lets you claim the lower of the UK tax or foreign tax as a credit.
Non-domiciled UK residents could historically use the "remittance basis" to shield foreign income from UK tax, but this regime was substantially reformed from April 2025 — most long-term UK residents now pay UK tax on worldwide income regardless of domicile.
Frequently asked questions
What is taxable income in the UK?
The portion of your total income that remains after applicable allowances (Personal Allowance, PSA, Dividend Allowance, etc.) are subtracted. Income tax rates are applied to this amount.
Is ISA interest taxable income?
No. ISA returns (interest from Cash ISAs, dividends and growth from Stocks & Shares ISAs) are completely tax-free and don't count toward your taxable income or any allowance thresholds.
Do I pay tax on gifts and inheritances?
Gifts aren't income tax. Inheritances aren't income tax. But Inheritance Tax (IHT) may apply to the estate of the person who died, and gifts made within 7 years before death can be added back to the estate for IHT purposes.
Are state benefits taxable?
Some are, some aren't. Jobseeker's Allowance and Carer's Allowance are taxable. Universal Credit, PIP, Attendance Allowance, Winter Fuel Payment are tax-free.
Is redundancy pay taxable?
The first £30,000 is tax-free. Amounts above £30,000 are taxable as employment income. Statutory redundancy pay, ex gratia payments and payments in lieu of notice have specific rules.
What about gambling winnings?
Gambling and betting winnings are completely tax-free in the UK, whether from casinos, bookmakers, the National Lottery or Premium Bonds. Unusual globally — most countries tax gambling income.
Quick links
- UK Tax Guide 2026/27
- UK Income Tax Rates & Bands
- UK Personal Allowance
- UK Personal Savings Allowance
- UK Tax Year 2026/27
- UK Income Tax Calculator
